IRA vs. CD

Difference between IRA and CD

IRA and CD are two popular plans to save money for the future.

IRA

Individual Retirement Account (IRA) is exactly like a permanent savings account where one can put a part of his salary without having to pay any taxes. Anyone can open it no matter he is in a job or doing his own business. As far tax exemption is concerned, the person needs to pay taxes only when he starts to get distributions upon the maturity of the IRA. Tax advantage is the most attractive feature of an IRA and this is why huge amount of money are there in IRA accounts held across the country. Even the interest is tax free and the account has a large amount in a few years. IRA is a type of an account, not an investment.

The maximum you can contribute to your IRA is $4000 if you are under 50 years. There is will be 10% penalty if there is any withdrawal of money from your IRA before you are 59 ½ years of age, but you are considered under certain cases as when using it for buying a house or for the education of children. You can open an IRA account with little payment that suits your needs. The payments need to on a yearly basis. IRA’s are linked to mutual funds and other securities so they are risky. It is the tax advantage that lures people towards an IRA.

CD

CD or Certificate of Deposit is a means for saving money for your future and is generally very safe as it is issued by banks. It also has more advantage than a normal savings account as the money earns a higher rate of interest. The only negative aspect is banks charge big penalties if you withdraw money from your CD before the term is completed which is generally 5 years in span.

Only you have a big amount to put into any bank can you buy a CD. You need to pay taxes on the interest earned annually. The payment for a CD is one time.It is the stability of the principal amount as well as higher rate of interest that attracts people towards a CD.